Introduction to Taxation Flashcards
What is tax legislation?
- Tax legislation/statutes are law and therefore adherence is mandatory
- Tax legislation includes statutory instruments, which are issued where detailed notes are required on an area of tax statute
When is tax legislation updated?
Tax legislation is updated each year by the annual Finance Act, which follows from the proposals made by the Chancellor of the Exchequer in the Budget. This is known as the budget cycle
What is case law?
- Refers to the decision made in tax cases brought before the courts
What does case law do?
- Often the case challenges current tax legislation or argues a certain interpretation off the tax law should be applied
- These rulings are often binding and therefore provide guidance on the interpretation of tax statutes
What does the efficiency principle state?
The efficiency principle states that cost of collection of tax should be less than the tax raised
What does HM Revenue and Customs do? (HMRC)
HMRC is the body that controls and administers most areas of UK tax law, but does not make the tax rules
They can also issue guidance as to explaining how to implement the law and give their interpretation of the law
What are statements of practice?
- Provide HMRCs interpretation of tax law and often provides clarification or more detail on how it should be applied
What are extra-statutory concessions?
- Given to specific taxpayers to relax the tax legislation. They are often given where undue hardship or anomalies would otherwise occur
- Challenged in 2005, so they are gradually being withdrawn or made law as appropriate
What are 3 ways HMRC offers guidance?
- Internal guidance manuals
- Website
- Press releases
What does the neutrality principle state?
The neutrality principle states that tax should not distort choice; however, taxation policies have been used to influence many economic factors such as inflation, employment levels, imports and exports
What is direct/indirect principle?
- Direct taxes are paid by those who generate funds (e.g., income tax, capital gains tax, corporation tax)
- Indirect taxes relate to consumption (e.g., VAT)
What is the progressive/regressive principle?
- Progressive: Progressive taxes increase with income (e.g., income tax rates rise as income rises)
- Regressive taxes decrease with income (e.g., national insurance rates fall as income rises)
What is the unit/value principle?
- Unit: calculated as a flat rate per item, regardless of value (e.g., beer duty depends on the beer’s strength not its price)
- Value taxes are a percentage of the value of goods or services (e.g., 20% on most goods sold in the UK)
What is the ability to pay/benefit principle?
These are two opposing arguments that tax should be based either on the ability of the taxpayer to pay (e.g., income tax), or on the benefit received (e.g. the NHS is available to all so should be funded by everyone)
What are the main external influences on UK tax objectives?
Historically, this was the EU but this will now change.
Many off the UK’s international tax treaties are based on the model tax treaty created by the Organisation for Economic Cooperation and Development (OECD)
Also the impact of global events, such as the most recent pandemic
What is the financial year?
Companies pay corporation tax on their income and gains based on the financial year
The financial year runs from 1 April to following 31 March
What is the tax year?
Individuals (employees, sole traders, and partners) are taxed annually on their income and gains for a tax year
The tax year runs from 6 April to following 5 April
What is MTDfB?
Making Tax Digital for Businesses is an HMRC project to provide businesses with a modern, streamlined system to keep their tax records up to date and provide information to HMRC digitally, on a quarterly basis, using an application programming interface
MTDfB is being phased in from 1 April 2019 and currently only applies to businesses for VAT purposes and even then only if their turnover is above the annual registration limit
Once fully implemented it will apply to all businesses, the self-employed and landlords. Exemptions will apply in limited situations
What are the responsibilities of HMRC?
- Collecting and administering IT, CGT, NIC, CT, and VAT
- Paying and administering universal credit, tax credits, and child benefit
- Collecting repayment of student loans
- Ensuring adherence to minimum wage rules
- Protecting society from tax fraud, smuggling and illegal importation of drugs
What can HMRC do to meet its responsibilities?
HMRC has various powers to enable it to meet its responsibilities (e.g., if a taxpayer does not fully cooperate with informal requests for information, HMRC can use its statutory powers to issue an ‘information notice’)
What are the two types of compliance checks?
- Pre-return checks
- Enquiries into returns already submitted
When must HMRC give notice of the intention to conduct an enquiry?
- 12 months after the actual filing date, if the return is filed on time
- The quarter day following the 12 month anniversary of the actual filing date if the return is filed late
When are the quarter days?
31 January, 30 April, 31 July, and 31 October
What is a determination?
If a tax return is not received by the filing date, HMRC can make a determination (estimate) of the tax due, and treat this as the amount owed
The determination must be made within three years of the statutory filing date.
A determination is displaced by the eventual calculation of the actual tax due
What is a discovery assessment?
A discovery assessment can be raised by HMRC if it comes into possession of information about a taxpayer’s tax affairs after the normal time limit for compliance checks has passed
What are the time limits for raising a discovery assessment?
- 4 years from the end of the relevant period if there has been no careless of deliberate behaviour
- 6 years from the end of the relevant period for careless behaviour
- 20 years from the end of the relevant period if due to deliberate behaviour
What are the five conditions for a direct recovery from the taxpayer’s bank account by HMRC?
- HMRC must issue notices to the bank, to prevent the taxpayer from withdrawing the amount due and then to require the bank to pay the amount to HMRC
- The amount due must be at least £1000
- There is time for the taxpayer to raise an objection
- The taxpayer must be left with at least £5,000 across all of their/ the company’s bank accounts
- HMRC must be satisfied that the taxpayer is aware that the sum is due
What can a taxpayer appeal against?
- An information notice
- A request for documentation in the course of a compliance check
- Amendments made as the result of a compliance check
- HMRC’s right to raise a discovery assessment
- A discovery assessment
- A VAT assessment
- The imposition of a penalty
When must an appeal be made?
An appeal must be made in writing within 30 days and state the grounds for the appeal
Any tax due will have to be paid unless postponed
How are appeals settled?
Most appeals are settled by agreement but if not settled will be heard by the Tax Chamber of the First-tier tribunal
What is a tax agent?
A tax agent is an individual who assists clients with their tax affairs
What can HMRC do if a tax agent has acted dishonestly?
If HMRC has evidence that a tax agent has acted dishonestly, leading to a loss of tax, it can:
- Issue a file access note to obtain the working papers of the tax agent
- Issue a conduct notice
- Publish information about the tax agent
What penalties are in-place for tax agents?
- HMRC can issue a minimum penalty of £5,000, up to a maximum of £50,000
- £300 penalty can be imposed if the tax agent refuses to comply with a file access notice, plus additional daily penalties of £60
The tax agent can appeal
What other breaches does misbehaviour by a tax agent incur?
If a tax agent is found by HMRC to have been dishonest he or she will be in breach of professional ethical guidelines. If the agent is a member of a professional body such as ICAEW there may be disciplinary consequences
